Get ready for Obamaloans: New regs could drive payday lenders out of business

By Eric Boehm  /   June 1, 2016

If you loved Obamacare, get ready for Obamaloans.

The Consumer Financial Protection Bureau, the federal regulatory agency established in response to the 2008 Wall Street meltdown to police banks and other financial institutions, is set to issue new rules Thursday that could reshape payday lending.

Payday loans are small-dollar, high-interest loans used most often by low-income workers to help cover monthly expenses between paychecks. The CFPB contends the $40 billion industry that serves an estimated 12 million customers each year traps workers in a cycle of debt that is difficult to escape.

The new rules will be the culmination of more than three years of work by the CFPB, and the latest step in an even longer crusade by progressives to see payday lending banned entirely.

When a draft version of the new regulations was released in March, the Consumer Financial Services Association of America, the trade group for payday lenders, said a “substantial part of the industry” could be forced out of business. According to a Politico report Wednesday, the CFPB’s own projections show that loan volume could fall by 84 percent under the new rules.

That’s all part of the plan, according to some critics of the CFPB who believe the Obama administration’s goal is to drive payday lenders out of business and clear the way for taxpayer-backed nonprofits — including one with direct ties to federal regulators — to take over the market for short-term lending with an expansion of taxpayer-subsidized loans, called “Obamaloans” by critics.

Iain Murray, a vice president at the Competitive Enterprise Institute in Washington, D.C., says the groundwork for a federal takeover of the small-dollar lending industry has been laid over the past few years.

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Image courtesy Competitive Enterprise Institute

MURRAY: After new regulations force payday lenders to go out of business, says Iain Murray of the Competitive Enterprise Institute, the taxpayer-funded “Obamaloans” will be the only game in town for low income workers who need help making ends meet.

“When all other sources of short term cash are outlawed for people with poor credit, where do they turn? The outcry will become overwhelming for federally backed loans to the underserved market,” Murray said in an email to Watchdog.

Along with the expected new regulations from the CFPB, President Barack Obama’s latest budget proposal contains $10 million for the expansion of the federal small-dollar lending program, administered by nonprofits known as community development financial institutions (CDFI).

What does that mean for low-income Americans who might occasionally need a payday loan to help make ends meet?

The CFPB says the crackdown on payday lending will help them escape the “debt trap,” but evidence from states where payday lending has been restricted offers a different narrative.

North Carolina banned payday loans in 2004 after an intense lobbying effort from progressive groups like the Center for Responsible Lending, which decried the industry as a “debt trap” — the same language now being used by the CFPB as it, at the behest of the CRL, crafts new federal rules.

Three years later, a study from the Federal Reserve of New York found low-income workers in North Carolina were worse off than they had been before the ban.  The Fed found higher rates of bankruptcies and bounced checks and found that more borrowers were seeking assistance from CDFIs and other nonprofit lenders.

One of the largest, and certainly the most politically influential, community development financial institution in the country is the Center for Self Help, which is based in North Carolina and was fingered by the Federal Reserve as one of the biggest beneficiaries of the ban on payday lending in the state.

Now, Self Help stands to benefit from both the expansion of federally funded small-dollar loan programs and the coming extinction of their competitors in the payday lending industry.

Some critics see a conflict of interest there, because the Center for Self Help owns the Center for Responsible Lending, which acts as its lobbying arm and has a direct conduit to the CFPB.

READ MORE: Lending Influence – How a progressive group profits from pushing financial regulations

Last year, emails obtained by Politico revealed that the Center for Responsible Lending spent hours consulting with senior Obama administration officials, giving input on how to implement the rule that would restrict the vast majority of short-term loans.

“The group regularly sent over policy papers, traded emails and met multiple times with top officials responsible for drafting the rule,” reported Politico’s Anna Palmer. “At the same time, the group’s financial services business, Self Help Credit Union, was pushing CFPB to support its own small-dollar loan product with a much lower interest rate as an alternative to payday loans.”

With the final rules set to be unveiled this week, critics are pointing to those emails and to a revolving door between the CFPB and the Center for Responsible Lending to claim that the progressive nonprofit had undue influence over policy.

Martin Eakes, who founded the Self Help Credit Union in 1988 and now serves as it’s CEO – as well as the CEO of the Center for Responsible Lending – has been pushing federal regulators for years to crack down on payday lending. In 2007, while serving on an advisory panel for the FDIC, which regulates banks, Eakes suggested allowing banks to extend small-dollar loans to anyone with overdraft protection on their checking account.

According to meeting minutes, Eakes said the most viable outcome of that proposal would be persuading policymakers that there are alternatives to payday loans, “thereby making it more palatable to prohibit payday loans.”

When Eakes pitched that idea in 2007, the CFPB did not even exist yet. Less than a decade later, though, he and other progressives who want to reshape the country’s financial institutions have found the perfect vehicle for doing that.

Created in 2010 as part of the Dodd-Frank Act, the CFPB has nearly unchecked regulatory authority over U.S. banks and financial institutions. To the cheers of progressives such as U.S. Sen. Elizabeth Warren, D-Massachusetts, the CFPB has cracked down on auto loans, payday lenders, community banks and mortgage brokers – though it has also helped to entrench the idea that some banks are “too big to fail,” the very thing that the CFPB was, in theory, supposed to fight against.

Payday lenders are the CFPB’s next target, but reshuffling the small-loan industry might not help American workers as much as Eakes and other reformers claim.

Almost four in 10 Americans say they don’t have enough savings to cover the cost of a $500 emergency, so there is no doubt that payday lending fills a vital role in helping people get by from paycheck to paycheck. But do lenders take advantage of their borrowers?

Image via Wiki Commons

ECHO CHAMBER: Richard Cordray, director of the Consumer Financial Protection Bureau, calls payday loans “debt traps,” mimicking the phrase of progressive groups such as the Center for Responsible Lending, which has significant influence over more than just language at the CFPB.

The CFPB certainly think so. When starting the crusade against payday lending in 2013, the agency issued a report slamming payday loans as too expensive and not suitable for sustained use. A sizable share of consumers end up in cycles of repeated borrowing and incur significant costs over time, the report found.

“For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates,” said Richard Cordray, director of the CFPB.

But that’s not the experience of most borrowers. The CFPB’s own publicly available data shows that just 1.5 percent of all complaints submitted to the federal agency were regarding payday loans.

The Consumer Financial Services Association of America says its research shows 96 percent of customers report payday loans to be useful and 84 percent said it was easy to repay the loans.

Some people do use payday loans irresponsibly and end up trapped in a cycle of debt, but even that minority might be worse off without payday lending as an option.  A 2007 paper by Mercatus Center researcher Todd Zywicki suggests that regulators are wrong to look at short-term loans using the same metrics as long-term borrowing like credit cards and mortgages.

In a rather typical payday loan, a borrower might take out $300 with a promise to repay $350 in two weeks.  That’s an annual percentage rate of 435 percent – an absurd interest payment, when even the worst credit cards typically carry APRs of around 30 percent.

Zywicki says that’s the wrong way to look at payday loans, since they’re not meant to be paid back over the long term — there is no “annual” to the percentage rate. And for comparisons’ sake, the effective APR on overdrafted checking accounts can be as much as 1,000 percent, according to the FDIC.

“Although expensive, payday loans are less expensive than available alternatives,” wrote Zywicki. “Misguided paternalistic regulation that deprives consumers of access to payday loans would likely force many of them to turn to even more expensive lenders or to do without emergency funds.”

In this case, the regulations will do little to protect consumers’ finances, while driving more people to use the products offered, at taxpayers’ expense, by organizations such as the Self Help Credit Union — just like what happened a decade ago in North Carolina.

“The infrastructure for this — the community development financial institutions — is already in place,” said Murray. “Obamaloans will be the only game in town.”